Q3 2021 First Commonwealth Financial Corp Earnings Call
Good afternoon, My name is David and I'll be your conference operator today.
I would like to welcome everyone to the first Commonwealth Financial Corporation. Three Q2 thousand 21 earnings release Conference call. Today's conference is being recorded all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press the star key followed by the number one.
One on your telephone keypad, if you like to withdraw your question Press Star one once again, thank you Vice President of Finance and Investor Relations Ryan Thomas You May begin your conference.
Thank you David and good afternoon, everyone. Thanks for joining us today to discuss first Commonwealth Financial Corporation third quarter financial results.
Speaking on today's call will be Mike price, President and CEO, Jim Murasky, Chief Financial Officer, James Your bonds Bank, President and Chief revenue Officer, and Brian Carroll, Our Chief Credit Officer.
As a reminder, a copy of today's earnings release can be accessed by logging on to F. C banking dot com and selecting the Investor Relations link at the top of the page.
<unk> also included a slide presentation on our Investor Relations website with supplemental financial financial information that will be referenced during today's call before.
Before we begin I need to caution listeners that this call will contain forward looking statements. Please refer to our forward looking looking statements disclaimer on page two of the slide presentation for a description of risks and uncertainties that could cause actual results to differ materially from those reflected in the forward looking statements today.
Call will also include non-GAAP financial measures non-GAAP financial measures should be viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP. A reconciliation of these measures can be found in the appendix of today's slide presentation.
With that I will turn the call over to Mike.
Thank you Ryan and good afternoon, everyone.
Third quarter net income of $34 $1 million produced core earnings per share of 36 cents accompanied by core return on assets of 143%.
Core pretax pre provision ROA of 179%.
This was a very good quarter for first Commonwealth with solid profitability growth and credit metrics. Other headlines for the quarter include first excluding PPP loan payoffs were pleased with loan growth of eight 2% or $132 $3 million in the third.
Quarter with ongoing strength in indirect lending home equity lending commercial lending and mortgage lending our growth is broad based between commercial and retail lending disciplines and has become increasingly granular over the years as an aside our loan growth over the first over the last two.
Quarters has not yet benefited from higher line of credit utilization.
Second the loan growth and improved margin enabled a $2 4 million quarter over quarter increase in net interest income to $79 million, Jim will have more color on the net interest margin.
Third noninterest income or fees grew $1 $2 million quarter over quarter to $27 $2 million on the strength of improvement in SBA and mortgage gain on sale income as well as higher wealth management income importantly, our card related interchange business.
It is $7 $1 million in fee income.
Our regional business model has been a strong contributor to fee income growth with better teamwork and collaboration enabling us to deliver a broader set of solutions for our clients for our efficiency ratio increased to 55, 7% as core net interest non.
Interest expense rose some $3 $7 million primarily.
Due to higher personnel expense, including higher incentive accruals based upon increased production higher wages, particularly in entry level positions driven by inflationary pressure higher hospitalization expense and then the hiring of the management team of the equipment Finance Division.
It's increasingly clear that we are not immune to expense headwinds in the current environment persists.
And importantly on the credit side, we guided last quarter for stronger credit metrics in the second half of the year in 2021, and that's exactly what is happening the third quarter represented our lowest loan charge offs in nine quarters.
A decrease in specific reserves for troubled credits.
Coupled with a general improvement in economic conditions, but to a provision of just 330000.
Down from $5 $4 million in the second quarter.
Our reserves now represent one 3% of total loans excluding PPP.
In a 247% of noncore nonperforming loans the level of nonperforming loans improved significantly from $52 $8 million in the second quarter suggest $38 1 million in the third quarter were 56 basis points of total loans.
Similarly, nonperforming assets of $39 million at quarter, and now stand at 41 basis points of total assets.
Subsequent to quarter end in early October.
$6 $9 million troubled credit was resolved.
We will be reflected in Q4 results.
Other notable third quarter items follow first Commonwealth earned the number one SBA lender ranking in Pittsburgh for the fiscal year ending September 32021.
This is a significant accomplishment and reflective of both the talent and the SBA lending team coupled with the partnership enabled by the regional business model alluded to earlier in the third quarter. We continued to transform our technology to include the selection of our new loan origination system.
Well as introducing several new cash management solutions or <unk> solution for our business clients.
We continue to be pleased with our adoption of our new mobile banking App, which is growing at an annualized rate of 18%.
As we work through our three year strategic plan I would share three of our six areas of focus that might be most relevant to investors.
First is to accelerate the growth trajectory of our company and we'll do this primarily through organic broad based loan growth across both our commercial and consumer loans.
<unk> continued to increase digital relevance to drive customer satisfaction ease of use and brand identity, primarily through the continued investment in customer facing technology.
And third anticipate an offset expense pressure to maintain operating leverage over a multiyear horizon I think that's because we realized one building new businesses like equipment finance from the ground up will negatively impact operating leverage at first but can have a powerful impact on operating leverage in the long run.
Sure.
Regarding growth we received many good questions about our equipment finance efforts. So let me provide an update on our progress.
As you recall, we did a lift out from our larger from a larger bank in June of our Philadelphia team with a 20 year track record of performance as we enter the business, we expect to fund small ticket loans and leases on equipment on a nationwide basis. The group's primary experience has been with the essential.
Used commercial equipment diversified across industries that equipment type.
The manufacturing.
Construction and professional service industries represent more than half of their originations by industry primary equipment types included utility trucks.
Highway trucks machine tools trailers, and manufacturing and packaging equipment. A good example of a piece of its essential use equipment would be a machine tool like delayed that a small business needs to run its business. We expect the average ticket size to be about $80000 and an average term 60.
<unk>.
Just on the historical performance of this team we expect yields in the mid 5% range and spreads in the mid 4% range with charge offs typically ranging from 55 to 75 basis points. If all goes according to plan, we believe that we can generate $200 million to $250 million.
Finance assets on our books by the end of 2022 before really hitting our stride in 'twenty three and 'twenty four.
And with that I'll turn it over to Jim.
Thanks, Mike.
As Mike already mentioned, we were pleased with our financial performance this quarter.
Hopefully I can provide you with a little more detail on our net interest margin fee income and expenses.
GAAP net interest margin expanded by six basis points this quarter to three 3%.
NIM expansion was driven by strong organic loan growth of just over 8% annualized.
NIM expansion wasn't impacted by PPP total PTP income in the third quarter was $5 7 million.
Up by only $200000 from last quarter.
As of September 30, we had.
$152 million of PPP, we made it on the books with $6 $3 million in fee income that remains to be recognized.
We expect that most of the remaining PPP balances will be forgiven in the fourth quarter.
Help the GAAP NIM.
The core NIM, which we calculate to exclude the effects of PPP and excess cash.
Fell from three 1% last quarter to three 6% this quarter.
Because we purchased $134 million of securities in the quarter had we not purchased and securities and just left the money sitting in cash.
Excluding cash on the core NIM calculation based on the way we calculate it.
And the core NIM would have dropped by only one basis point to three 9%.
We think that the core NIM is bottomed out and should drift upwards from here as we redeploy excess cash into loans.
Our cost of deposits in the third quarter was down to only six basis points.
I am pleased to report that our last remaining tranche of high cost deposits.
$52 million at a cost of 165%.
On October 13th.
Subsequent to quarter end.
That alone will save us nearly $1 million a year in interest expense at about appointing them.
Well, we could benefit of that starting in the fourth quarter.
With that behind US, we're down to about $400 million of time deposits remaining at a cost of 36 basis points three quarters of which will mature by the end of 2022.
So while some deposit repricing opportunity remains.
Very far along in replacing our entire deposit book, leaving us very well positioned if rates rise.
With that in mind, we've taken a hard look at the deposit beta assumptions in our interest rate risk sensitivity calculations.
In light of unprecedented levels of liquidity, we are revising our interest rate risk assumptions to reflect the ability to lag deposit rate increases for the first 225 basis point rate hikes.
<unk> will be what we believe to be a more accurate picture of our asset sensitivity in the current environment.
You'll see this in our IRR table once we publish our 10-Q, but to give you a preview a 100 basis point parallel shock will show an increase in the first year of net interest income of over 5% that's roughly double the previous level of sensitivity. So we wanted to explain the reason for the change.
Even without a rate hike. However, the NIM story in 2022 will be driven by the redeployment of excess cash into loans, especially since we believe that deposit balances will remain relatively stable throughout 2022, and any loan growth above cash levels can be funded by cash flow from the securities portfolio.
This effectively rotates lower earning assets into higher earning loans. This asset rotation should benefit NIM in 2022, even if rates don't rise and then if they do rise our asset sensitivity will kick in and expand the market even further.
Turning now to fee income.
Fee income of $27 $2 million in the quarter, we need the bright spot in Q2, one aspect of our company that has consistently underappreciated.
There has been talk of a slowdown in mortgage on year mortgage gain on sale income actually increased by $400000 over last quarter.
SBA is another fee income engine that continues to gain momentum now that PPP is mostly behind us with SBA gain on sale income up by $700000 from last quarter to $2 4 million.
Card related interchange income continues at new record levels for us of approximately $7 million a quarter and deposit service charges. After the off pace for much of the pandemic due to heightened cash levels and customer accounts have returned to more normalized levels.
Turning to noninterest expense last quarter, our guidance was 53% to $54 million and we came in at $55 million for the reasons. Mike described like many of our peers. We are experiencing expense pressures, mostly related to people costs like salaries and benefits.
While there is some normal variability in cost quarter to quarter, it's difficult to see niu falling from current levels.
Fortunately the pace of our loan growth gives us confidence that our revenue.
Can outpace expense growth.
Finally, we repurchased 997517 shares of stock during the third quarter and an average price of $13 35.
While we ended the quarter with approximately $10 $3 million remaining of our $25 million share repurchase authorization. We are also pleased to announce that our board authorized an additional $25 million share repurchase authorization yesterday.
The increase in the authorization. So that we can repurchase authority available to redeploy expected excess capital generation in the fourth quarter and into next year.
And with that we'll take any questions you may have.
At this time I'd like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
And we'll take our first question from Mike Perito with Kate EW.
Hey, good afternoon, guys. Thanks for taking my questions.
Good afternoon.
I wanted to start on.
The cost piece.
It sounds like between the kind of the qualitative items that Mike described and then the guide I mean that this $55 million range.
Can you just say I guess, it's just been try to extrapolate that into what kind of growth. We can see next year I mean, obviously, it's a fairly sizable step up I mean do you think that there is a lot of upward maybe not a lot, but if theyre upward pressure off of kind of this quarterly run rate on an annualized basis or do you think.
It's more kind of low single digits full year on year.
Type of growth for the expenses.
On the expense side.
Yes on the expense side.
Over the last.
Seven or eight years.
We have nips and tucks expenses and done some significant things to make sure and ensure we have operating leverage and we plan to continue to do that.
We're going to have a little blip here as we invest in equipment finance and that could be a huge platform for us and then we realized revenue really in the latter half of next year with $50 million does feel like kind of a new number its a bit unexpected.
The impact of a lot of our lower our entry level positions, which was absolutely vital for customer service or call Center has just blossomed boomed.
And it supports the digital capacity of the bank, but the costs are higher than we would've anticipated six to 12 months to 18 months ago.
So that's really the foundation I think we're just sorting through it a bit I think jim's.
Statement that $50 million is something we'll come to grips with.
<unk> 55 forgive me.
And but we're working through plans for next year and invariably.
We do things to make sure that we get cost out from time to time, and but we're not prepared to announce anything like that at this time.
No that makes a negative.
Sorry go ahead.
And his team.
It's hard to give exact immediately.
Tell me do that so there'll be some variability quarter to quarter. There are a few things in the third quarter that were one time costs, but not many sort of kind of light.
There is some general guidance there.
Yes, I was going to say maybe coming at it slightly differently. I mean, obviously 2021 was a bit of anomaly in many ways.
You're on pace to do a call it 55% efficiency ratio for.
For the year, but if we think about 2023 and 2022 relative to 2020 right. I mean, you guys. I think we're at 57% I mean, it's reasonable to think that youll, probably be below that as PPP comes out but not.
Not where you'd been year to date, just because of some of the equipment finance investments and some of the wage pressures that maybe a better way to frame it.
Yeah.
I think so I mean I think also the reality is is that we have to think long term not only about the business in its current state, but how we continue to invest in digital platforms.
Business platforms with <unk> and other tools that will invested for the future. So we really have to find costs and find opportunity to continue the level of investment we've had in the last five years on top of general.
<unk>.
Inflationary and other pressure so it's.
There's a lot of neat there always is a lot to be that needs to be kind of a three year plan and that that isn't changing our company changes pretty significantly. If you look at it every two to three years in terms of how we do business the platforms, we've broadened them.
Our digital relevance is there will continue to invest there that's a long winded answer, but it's got a cryptic answer to your question. There's a lot of plans that will go into maintaining operating leverage over the next year or two.
No no.
That's helpful. So thank you and then.
For me, it's just on the capital piece, you know don't want to talk for others, but a little bit more buyback activity that I was expecting.
It sounds like you guys still have some appetite moving forward I was wondering if you could expand on that a little bit and then just Mike maybe provide an update on kind of the M&A environment and any changes over the last 90 days what's reported.
Yes, no assurance pretty simple I mean, we we have.
Authorization remaining about $10 million. So we're just generating a lot of capital for loan growth is really working we think will generate over $20 million of excess capital in the fourth quarter and so there's a good chance that we would run out of authorization and so we want to have more incentive and prudent to increase the authorization and the way we can go back into the market and buy the stock.
We accelerated buying back on the <unk>, we just think it's smart to do that and so we wanted to have authorization rates in case that happens so.
There is also the prospect of perhaps taxes buybacks, but that's all speculative at this point, but that's been in the news. So there's some backend motivation to these buybacks now but.
Highly speculative.
Driven by excess capital generation.
On the M&A front I mean, we've had over the years I think Jim and I have shared.
Over 55 irons in the fire to do five.
It has to work for us both strategically and financially.
Something that.
We see a nice path to execution with lower risks.
And those have been our criteria and we've tended to be smaller type deals rather than larger deals and new support for us every one of them.
And.
So thats our MRO, there's always something in the air, but theres, a big difference between that and making an announcement.
Got it helpful guys. Thank you for taking my questions I appreciate it.
Thanks, Mike.
And next we'll go to Steven Duong with RBC capital markets.
Hey, good afternoon guys.
Robin.
Mike.
The SBA gains and does.
It looks like.
It did pretty good this quarter I guess is there anything specific about the environment now that.
Jump to.
We are up by 700000 to $2 4 million and I guess what was it.
<unk>.
One something before.
Just curious like what led to the strong performance in that business.
But just like mortgage and SBA and soon to be equipment finance, we've made major investments in these platforms.
Take several years to realize the investment over the past year. If you go back gain on sale income over the last seven or eight quarters.
We were four or 500000 up to 1315 $1 11624.
And that was a very intentional we've added to the sales force we've invested in the capacity.
Our chief Credit Officer, Brian tariff likes to say a crawl walk run.
Exactly what we've done but we feel like we're just.
Beginning to hit our stride in this business and.
And that was the intention to go from.
SBA is kind of an exception business. The SBA is a real crown game kind of business just come from a larger bank environment, Jeff Rosen and <unk>.
Who runs this business and his team and they've run some large platforms for some bigger banks. So we think we have the vision to execute this and make it a core part of our noninterest income and we're excited about it too because that really helps our borrowers can't quite get over the hump to get us there.
Done for them and when you do that you really have a customer for a lifetime. So we quite frankly, we really like the business and I think.
The other thing is just with the onset of PPP.
Our capacity was with PPP and appropriately so at the end of the day.
We've been over 8000 loans for $900 million, which we felt was appropriate.
And our communities to support our clients. So this is a business that it's not.
It's about a fleeting thing I mean, we have we had one mentally have two or three we're going to have more oars in the water in this business each year.
Okay, that's great to hear and I guess the business is it.
You've made all these investments is it fair to say that.
There is a little bit of a moat around the business. So it's not something that anybody can just jump in and also with the business is there any cyclicality to the business or is this something that is just you guys.
Brown and discontinue on growing the business.
I'm going to turn it over to <unk> <unk>, our president and Chief revenue Officer, and she works closely with Jeff and the team on this business.
Jane do you have can you answer Stephen's question.
Sure. Thank you Steven.
Yeah.
I think the important things that we've done with SBA.
Between Jeff Rosen.
And keep the final.
We have.
Some pros that have run the business as Mike said.
Much larger platform and we've been very clever about integrating that oversight.
With local law.
Local market representation, so our local bdo's are part of our region.
And.
We think we've got the compensation structure, where everybody's interests are mutually aligned there is no no fighting no bickering note.
No, arguing about what's right for the client.
And so it's nothing.
Too fancy, but it is tough to replicate because it all has to work together.
Mhm.
Yeah, Great question, Steve about the about the barriers to entry I think it's.
You are a year or two or three.
And Thats with the right talent and then James said something pretty profound in that is it has to be integrated with the local market, but still important and we feel like we get there with the regional business model and with tight integration between our commercial banking floors doing SBA loans and Thats, a real credit to them.
That's great to hear and is there any cyclicality like the mortgage business or is it less cyclical.
I apologize.
I think it will not.
The cyclical like mortgage.
I do think we're going to have to look a little bit harder next year, because we will lose the 90% guarantee and it will go back to me for a normalized 70% guarantee.
I think.
I think that regardless, we're going to do just fine the pipeline today.
Probably up.
By double from last year in the last year, we didn't have a lot of PTT going on but we have very healthy pipelines and closing in underwriting.
Got it no I really appreciate that that's really helpful and yes. It sounds like it's such a great wonderful business to have some recurring fee income.
Going forward with that.
And then.
Maybe just on the.
The rate sensitivity that you guys spoke about the plus 100 basis points.
Great to hear that you looked at the beta assumptions and so.
As I'm reading is listening to this right.
There's a lag on the first $2 25 basis point rate hike.
Does that mean that its zero and then the third rate hike you put a beta.
Higher beta on and if so what is the beta number.
Yes. Good question just to clarify the beta number is based on our historic.
Deposit studies, and it's 25% beta.
And we've been using a 25% beta for some time.
The lag I mean zero percent data for the first two rate hikes, and then you just click to the 25%.
Data for <unk>, and then 567 when you do the 200 300 basis point parallel shifts as well.
We have looked at and there are some I think.
Sunday suggests you could February and a little bit for the first time in the second half incentive in the third that's just gets too complicated. We think this is just to help the assumption and I think it's a much more accurate picture of what we and other banks like US a lot of liquidity would actually do.
In a rising rate scenario.
Yes, I totally agree I mean, considering all.
All of those.
Posits that you guys are having right now I can't imagine.
Those were important for deposits on the fifth.
The first one or two rate hikes.
That's it for me I really appreciate you guys taking the questions. Thank you.
Thank you.
And next we'll go to Daniel Tamayo with Raymond James.
Hey, good afternoon, everyone.
Thanks for taking my question.
This is probably something you've explained in the past but.
The calculation of the core NIM figure, which you talked about being $3 16 in the quarter.
Want to make sure I understood that correctly because.
The margin expansion in the third quarter.
You said did not come from <unk>.
P fees, but the core NIM.
Contracted in the quarter.
Did I hear that there was you excluded excess cash from that calculation.
Yes.
Recognize that Theres no real industry standard for our corn.
We want to be careful about that kind of thing we do.
You publish a full reconciliation.
An earnings release Powerpoint supplement that is available on our website in the Investor relations portion of the website.
We tried to be pretty disclose of about these things and get all the numbers, maybe you could do the calculation differently, but.
You understood a property we are trying to exclude PPP as it had never even happened from the numerator and denominator the earnings and the balances and then the excess cash as well because those are both distorting effects.
And.
<unk> will probably be behind us pretty soon but the cash will linger for a while so we'll probably keep that practice.
A reconciliation.
Probably for the next year.
Okay, great Yeah, I'll find that thank you and then.
Assumptions.
Thanks, Eric this correctly as well.
I said deposits are going to be flat in 2022, what does that assume for the.
The excess liquidity on the balance sheet.
Yeah, and part of that assumption comes from the idea that some of the excess liquidity will finally be spent we haven't seen a lot of that we look at some industry studies that show people will start spending down some of that excess liquidity and the basic idea behind it it's not that complicated that we always get normal growth in deposits, we have I think 6%.
Non interest bearing deposits with last quarter.
So there is some growth in deposits normally in that but the spend down will offset that and as those two offset each other a roughly <unk> <unk>.
<unk> balances steady and thats good for us because that means.
Instead of growing both sides of the balance sheet, we can just take the excess cash and redeploy it into higher earning asset like loans.
That's the idea.
Understood I appreciate you getting up the speed that's all I have thank you.
Thank you.
And as a reminder, ladies and gentlemen at Star one if you'd like to ask a question next we'll go to Russia excuse me Russell Gunther with D. A Davidson <unk> company.
Hey, good afternoon guys.
Hey, Russell.
I wanted to spend a minute on the organic growth outlook you guys have been outperforming on that front for the last couple of quarters.
Depending on how <unk> shakes out really tracking above that mid single digit rate.
As you look to Mike layer and that quickly financing mentioned, even the low end $200 million I mean, thats quite a quite a head start so.
Or are you thinking about overall growth rate.
Both within I don't know.
To call it core Fcs.
It's going to be core to but.
Growth expectations outside of the equipment Finance and then layering that on top as you look into next year.
Yes, I'll make some comments and let Jim.
President clean up after me I got a report I'll, let's start on the on the commercial side I got a report from Brian character to Starbucks for the call. The loan committees have been pretty busy we're seeing some nice activity in.
Commercial real estate, particularly multifamily and industrial warehouse and.
Our commitment has really climbed.
Newer commitments over the last several months since early may.
And with a lot of nice new approvals, but the utilization in the Outstandings are still low and that will turn as these projects mature lots of tailwind there in the construction portfolio.
We moved the C&I, we've really de risked that business over the last decade, or so and it's a lot less chunky than it used to be because we look at our pipelines that we really like the activity.
Jan and I mentioned SBA pipelines are very strong and so we feel good about the commercial business, even better than a quarter or two ago and in the consumer businesses had been really hitting their stride I mean, when we look at the activity of whether it's consumer lending in our branches.
Where the indirect activity.
It's up nicely order of magnitude, 20% in each probably year over year. So I think fundamentally Jane and the team are just the businesses continue to improve its not really sexy.
It's just training.
<unk> productivity its focus.
And John what would you add to that I mean, we feel good about where we're at with blending in the future over the course of the next year, notwithstanding equipment finance Jean anything I'll listen.
I don't think Youre missing anything Mike, but the only thing I'd add Russell is.
Our loan growth is so diversified that it does make it a little bit tricky.
To manage the efficiency.
<unk> ratio.
Got it.
A couple of extra businesses that other banks don't have.
And.
I would take that problem any day, but it does mean, but we always have to be thinking about the expenses, but I feel good about where all of the businesses are.
We've tightened a little bit on the consumer side during Covid and we did not so we didn't loosen yet.
So we're still.
We're still getting structure that we've won delinquencies are at historic lows.
And we're still growing the books and the pipelines are healthy across the whole bank.
Really good about it.
And I guess I appreciate that.
And I feel good about equipment finance.
It's tough to stand up a business and.
In the middle of a pandemic because it takes working remote and all that but we're staying on track with vendors are.
Good partners. So I think we're going to be just fine.
Thank you Jane Thank you, Mike I guess, just as a follow up you mentioned consumer just hitting its stride havent loosened there yet.
Would you expect those verticals to continue at a similar pace or is there any appetite to.
Dial that back or a remix growth as the equipment finance comes on.
I think it's too soon to say that we would be mix.
We are close to any one business segment limits. So we can.
I think we can keep.
Keep going just the way we are.
Okay, great well. Thank you both that was it for me.
Thanks Russell.
Next we'll go to Frank Schiraldi with Piper Sandler.
Hi, everyone.
Right.
Keith.
A follow up on buybacks, Jim I Wonder if you could just remind us.
In terms of.
Parameters around where the buyback is attractive.
Earn back.
And then sort of what's the threshold there.
Yes.
Really not driven by an earn back calculation.
We understand people will look at the earn back calculations say thats long and I'd, rather not to because of the earn back that express is not really driven by that.
Right now in the marketplace, we're in blackout, but we have an arrangement at 75 range for instance, under the current authorization. So we are right now buying back at any price below $14.
When we come out of blackout three days from now under the remaining authorization with a new authorization, we may increase that and it's really driven by our view that we are still fundamentally undervalued.
And we're not just saying that any bank management teams that always say theyre undervalued, we look at kind of the regression analysis that shows with banks with our ROE should be trading up and we think that even though we.
Like where we're trading right now in our price book basis, we're earning a higher multiple than what we have as long as that's the case, we think theres room to buy back that stock because there come a day, we're trading at a much higher level, we'll look back and wish we had bought more at this level.
So now the buyback the nice thing is that it's flexible if theres a better opportunity to.
The capital accretive merger.
Cause the buyback and do that instead and we've done that in the past. So that's always on the table as well, but this is just a way to redeploy the capital.
The other thing is the capital ratios because we are generating so much capital keeps creeping up and so we want to make sure we're not under leveraged S&P published in the earnings release, the tangible common ratio ex PPP is at eight 9% probably at the higher end of the range, where we like it so theres plenty of excess capital.
Sure.
To deploy and that's kind of our philosophy on buybacks.
And then just lastly, just want to make sure I'm thinking about it right in terms of my modeling you talked about the core.
Bottoming out and just wondering does that assume any securities purchased additional securities purchases or or given the loan growth. You guys are expecting does that kind of take care of the excess cash over the next 12 months.
Thanks for asking that gives me a chance to clarify.
No, it's really driven by the idea that the excess cash will be redeployed in loan growth. We we have deployed some of the excess cash we generated through the pandemic through the government stimulus programs and the conversion of the PPE loans forgiven into cash we will redeploy some of that into securities. So the securities portfolio as you can see in our balance sheet has grown but that's most.
We run its course at this point, we will probably maintain the securities portfolio right about at the level that it's at.
We'll reinvest cash flow from the securities portfolio to keep it at that level.
But the idea is that the cash we have remaining on the books, which was close to $300 million around quarter end.
That should be used to be redeployed into more profitable loan growth.
Over the next 12 months.
Right, Okay that makes sense thanks for the color.
Thanks Frank.
Yes.
And next we'll go to Daniel Cardenas with Boenning and Scattergood.
Hey, guys good afternoon.
Quick.
Quick question for you so given given the improvements that we've seen in nonperforming assets.
And loan growth.
We saw a decline in your loan loss reserve levels to 144 144 last quarter.
And minimal minimal provisions this quarter.
Should we expect to continue to see that ratio decline as you continue to grow.
And how should we think about provisioning on a go forward basis for you guys just match charge offs are.
Yes.
Thinking about growth as well.
Hey, Brian Youre on the call why don't you answer this Brian Carroll, our Chief Credit Officer.
Yeah.
Sure.
Brian you out there.
Yes.
This credit is a good story.
Positive yes.
We long term charge offs match.
Provisioning.
We feel good and we had mentioned the subsequent event of $7 million that drops our NPA and our npls. So we're well positioned with good coverage of our nonperforming loans.
Yeah, we're in a good position with credit.
With low delinquencies the criticized in the other categories have fallen.
So I think there'll be pressure in our modeling probably to release some reserves, yes, Dan if I could just add in Brighton must be must have connectivity issues with clients with Charlie sorry about that.
But the basic formula.
Reserving for charge offs, and then for loan growth kind of remains the same.
The wildcard is seasonal.
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Extra qualitative factors around form general economic condition, so that can always change.
If the economy looks like it's going South is predicted to go south of seasonal reserves could be affected by that.
But the general provision expense quarter to quarter is really going to be driven by charge offs and loan growth.
The only color I'd add on top of that.
The whole conversation is that our asset quality is getting so big and the economic outlook is not does not look like its going stop looks pretty good. Thanks.
Thanks, Mike Us are having a hard time, finding rationale to hang on to the qualitative reserves that we have.
So, it's getting harder and harder to justify the qualitative review as you have and how.
How much are you might want to probably will not be able to do that going forward.
Your line is open.
Okay.
Yeah.
Hey, Brian.
Yes can you hear me yes.
Yes, we can hear you now.
Okay.
Yes, I think you were spot on with your answers and I don't really have anything to add it will really be very much around loan growth economic conditions and proven in our loan portfolio and charge offs.
Well great.
[laughter].
And then just one last question here on the equipment finance on the guidance that you gave of the expected growth is that purely with the team that you have in place and does that factor in additional hires throughout the course of the year.
Yes, great question.
That factors in additional hires I mean today, we only have 17 members on the board there the bras and the people that run that there'll be adding.
Cadre of more operations and salespeople over the course of next year.
Will be some cost associated with that.
Is that helpful. Dan.
Yes, Sir.
Great Thats, all I have I'll step back thanks, guys.
Thanks, Dan.
There are no further questions at this time I'll now turn the call back over to Mike price, President and Chief Executive Officer for any additional or closing remarks.
Yes, I always say this that I appreciate your interest in our company and albeit with a number of view over the course of the next quarter, both Jim and I.
And.
Our story is one where we just try to get better every quarter and we deliver on that we think obsessively about operating leverage we've really broadened the base of our fee businesses.
Our core commercial and consumer businesses.
Get better every year.
Switch gears to our regional banking model that is really producing for us on the noninterest income and the growth side.
As well and just feel good about the future of our company and thank you again and look forward to being with you over the course of.
This fourth quarter take care.
This concludes today's conference call you may now disconnect.
Okay.
Okay.
Yes.
Okay.
Yeah.
Sure.
Yeah.
Yeah.
Okay.